Europe's countries fall into three blocks for credit: fizzers, bubblers and fizzlers. Fizzers include Estonia, Latvia, Hungary, the Czech Republic and Greece. Bubblers comprise an arc of nations with credit markets, stretching from Finland, south west to Portugal and then eastwards to Cyprus. Fizzlers, with the slowest growth, are in the Eurozone heartland in and around Germany.
Consumer credit as a percentage of gross domestic product (GDP) is high in the UK and low in Finland. Total lending (including mortgages and consumer credit) as a percentage of disposable income is higher in the Netherlands than in the UK, despite the UK's reputation for profligate borrowing. Looking specifically at consumer credit in relation to household income, the UK is the most indebted European nation.
Greece's credit market is the most dynamic among the Eurozone countries, but has been growing too fast for comfort. Credit markets are also growing rapidly in Eastern Europe.
Companies working to become pan-European lenders include BNP Paribas, Crédit Agricole and Santander Central Hispano. Provident Financial focuses on countries with a preponderance of low-income households and unsophisticated consumer credit sectors. Interest rate caps apply in several European countries and give borrowers helpful protection.
THE UK - PROPERTY BOOM FIRES BORROWING BONANZA
The UK's economic situation is relatively robust. This is just as well, because UK households and housing associations owed £936.69bn as at 31st December 2003. The amount outstanding rose by 0.7% just in December 2003. Rising debt levels among the under-25s are a significant worry for the future.
Much borrowing is for property improvement and buy to let, for financially assisting children and other relatives, and for new loans to refinance debts.
FRANCE - TOUGH MARKET
The French credit market is growing slowly. Strength in mortgage lending has reduced the capacity of mortgageholders to take on new consumer credit. Interest rate caps and privacy safeguards favour borrowers rather than lenders.
GERMANY - HARSH WELFARE CUTBACKS
Severe cutbacks in social welfare provision and reductions in job security are hitting German households hard. Households are tending to borrow to try to maintain their standard of living. Mortgages have been boosted by a grant to homebuyers - the Eigenheimzulage - but this is being drastically reduced and potential homebuyers fear it may end completely.
Privacy restrictions make accurate credit risk assessment difficult. There are large numbers of non-performing loans, which commercial banks are selling off.
BELGIUM AND THE NETHERLANDS - LIMITED SCOPE FOR GROWTH
Consumer protection and credit regulation is extremely strict in Belgium - users of revolving credit have to clear their debt at specific intervals. The market is not sufficiently attractive to inspire strong competition between financial-services groups.
In the Netherlands, many borrowers are struggling to meet repayment obligations, despite statutory limits on interest rates. Households' mortgage debts are more than twice their savings deposits.
SCANDINAVIAN COUNTRIES - LITTLE NEED TO SAVE, LITTLE REASON NOT TO BORROW
The long-established welfare states and the political stability of the Scandinavian countries encourage consumer confidence, including the confidence to borrow. Consumer borrowing has been rising significantly in Sweden and Finland. Lending is stable overall in Denmark, disguising a shift towards revolving credit and away from fixed-term loans. Bonds fund mortgage lending in Denmark, a practice that is spreading across Europe.
ITALY - CREDIT GROWTH DESPITE USURY LAW
Italy's consumer lending market is the least developed of the large EU economies. There is an interest rate cap imposed by the law against usury, but consumers are finding plenty of credit despite this.
SPAIN - HOUSEHOLDS STRUGGLE
One household in 12 in Spain spends over half its income on debt repayments. Lenders are worried about the debt burden carried by these households. On the other hand, almost half of Spanish households report being debt free and so form a potential market for new credit.
Mortgage lending is strong. This is partly due to demand from North Europeans for homes in the sun, making property worryingly expensive for the home population.
SOUTHERN EUROPE - CONTRASTS IN PORTUGAL AND GREECE
Consumer credit is surging in Greece, where borrowers benefit from controls over interest rates.
Conversely, Portugal's consumers are cautious about taking on new debt. Mortgage lending is inflated by demand for property from North European buyers. A subsidised mortgage scheme, which used to help low-income buyers, has been scrapped, making life tougher for young homebuyers.
EASTERN EUROPE - THIRST FOR CREDIT
There is a lack of accurate data in this region on which to base credit risk assessment and accounting standards are also an issue. These factors contribute to the worrying levels of repayment arrears and defaults. Bad debts are a problem for the rapidly expanding home-collected credit sector. Provident Financial, the leader in home credit in Eastern Europe, is one of the few UK companies to develop large-scale financial services in the region.
The consumer credit market in the East European countries joining the EU in 2004 would be adversely affected by the European Commission's proposals to harmonise - and strengthen - consumer credit regulations to help prevent borrowers from incurring debts they cannot afford to repay.
THE FUTURE
The EU's proposed Consumer Credit Directive has problematic aspects for lenders and borrowers. As drafted, it would have made revolving credit harder and more costly to obtain. However, in September 2003 the European Parliament insisted that the Directive was rewritten to have a softer impact on low-income borrowers.
Countries with interest rate caps protect consumers but make business less attractive for lenders if market interest rates soar. Any rise in interest rates, especially in countries without caps, would increase bad-debt levels, which are already worryingly high in Eastern Europe. Huge bad debts in South Korea are a warning to lenders in Europe and a sign for credit providers to be cautious as they enter the massive Chinese market.
Points to watch include:
Insecure economic development in Eastern Europe, where defaults need to be managed extremely carefully if the region is to live up to its considerable potential as a new market for credit.
Overdependence on tourism around the Mediterranean. A reversal in tourism income in Greece would slow the booming credit market there.
Pressures on incomes in the core Eurozone countries, notably Germany, France, the Benelux countries and Austria, as governments reduce welfare state provisions. Many consumers will have smaller disposable incomes from which to repay their debts.
Although UK consumers are overindebted, short- and medium-term economic prospects in the UK are brighter than those in most of Western Europe.
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